Treasure Chest: Worley’s Opportunity Is… Green?

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Worley has the means, as a global contractor, to benefit from investment in sustainability projects. Yet, does the stock reflect the leverage?

-Massive investment required for sustainable energy and decarbonisation across the globe
-Substantial opportunity for Worley in targeting these projects
-Will this translate to better margins?
 

By Eva Brocklehurst

Can Worley ((WOR)) capitalise on the energy transition? UBS believes the case can be made, amid a substantial increase in investments in sustainable energy and decarbonisation globally. The theme is likely to attract even more attention as the UN Climate Change Conference in Glasgow opens.

The broker's research has signalled a cumulative investment of US$115trn is required to achieve net zero emissions by 2050. Hence, global energy investment must increase fourfold over the next thirty years.

Timing is obviously uncertain, yet one thing is clear: many companies as well as countries are adopting net zero targets and this supports the investment outlook. In the case of Worley, with its 50,000 engineers and support staff that can design and deliver complex energy projects, the opportunity is therefore substantial.

Cpompany management did provide a cautious outlook in its last update, noting conditions were improving yet also signalling customers have been hesitant to commit to large expenditure because of the uncertainty of demand.

The company is planning -$100m to be invested in sustainability over the next three years amid a mix of operating and capital expenditure to boost its capabilities. Macquarie has noted this relates to organic investment rather than acquisitions although the latter could be on the agenda.

The new CEO, Chris Ashton, has re-set sustainability/energy transition strategies and is targeting work across decarbonisation projects. UBS calculates sustainability projects are just 14% of sales at present while making up 32% of the company's potential contract wins.

Pursuit Of Sustainability

Worley has divided sustainability into four areas: decarbonisation, resource stewardship, asset sustainability and environment & society. Of the four, decarbonisation represents the largest, with an estimated investment of US$1.5trn per annum of which Worley's addressable market is 3-15%.

The company, at its results presentation, also signalled that gross margins for sustainability projects were higher than its traditional business margins. Credit Suisse, on the other hand, suspects competitive and margin pressures may increase when targeting sustainable growth segments.

Furthermore, pursuit of "alternative commercial models" is indicative of a challenging environment to secure contract awards and the broker suggests this could result in Worley assuming more risk, although acknowledges management at the company disagrees.

The problem is, Credit Suisse asserts, no matter how well management performs, for the short term there is not much margin improvement available because of the restrictions on energy capital that makes for a relatively static worksheet.

While management expects restructuring costs will finish when its transformation program concludes in FY23, the broker also doubts the market will be completely assured until this is actually done and dusted.

Morgan Stanley's concerns centre on the pace of decarbonisation, albeit the company is well able to take advantage of the transition to sustainable energy investments. Yet, whether this segment is growing fast enough to apply a higher multiple than the long-run average is questionable, in the broker's view.

UBS is less fearful and upgrades to Buy, raising FY22-24 estimates for earnings per share by 1-5% to reflect the leverage. The broker assumes a 10-year growth rate of 11% in energy transition capital expenditure, more conservative than the industry's 13%. The broker calculates the current Worley share price discounts an investment growth rate of 8%.

Consolidation?

Credit Suisse believes greater scale is required by contractors to enable leverage in negotiations with customers as these, in turn, consolidate. The broker questions whether the market requires so many global operators such as Worley, Wood Group, Petrofac, Fluor and Technip.

FNArena's database has three Buy ratings and three Hold, with a consensus target of $11.79 that signals 3.3% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.2% and 4.8%, respectively.

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